- What Are Shariah-Compliant Mutual Funds?
- Restrictions According to Shariah Law
- How Do Shariah Mutual Funds Work?
- What Is The Difference Between Shahriah Mutual Funds Vs Regular Funds?
- Who Can Invest In Shariah Mutual Funds?
- Best Shariah Compliant Mutual Funds In India
- How Are Shariah-Compliant Mutual Funds Taxed?
- Are Shahriah Complaint Mutual Funds Profitable?
- Final Thoughts
Some investors believe in a value-driven style of investing rather than solely focusing on returns. For Muslim investors, this means following the principles of Islamic law (Shariah), which prohibit investment in certain sectors like alcohol, gambling, etc. In this blog, we break down what Shariah-compliant mutual funds are, how they work, who can invest in them, and whether they can be a profitable option for your portfolio.
What Are Shariah-Compliant Mutual Funds?
Shariah-compliant mutual funds are investments designed to align with Islamic law (Shahriah). This law states than a Muslim should not invest in companies that are involved in unethical activities or haram (forbidden).
Shahriah-compliant mutual funds are for Muslim investors who wish to invest and grow their wealth without compromising on their religious beliefs. However, other investors who prefer ethical investing regardless of religion can also choose to invest in these funds.
Restrictions According to Shariah Law
Shariah law sets clear guidelines of all the categories of investments that Muslims are not allowed to invest in. These include:
Avoidance of Interest (Riba)
Riba in Arabic means excessive charges on borrowing money. In Islam, interest income is considered unjust and is thus forbidden. However, today, since most businesses generate interest income, businesses with up to 3% of interest income are included, and the rest are filtered.
No Investment in haram business
Businesses involved in alcohol, gambling, tobacco, weapons manufacturing, etc, are considered haram (forbidden) and are thus prohibited. Excluding these businesses ensures funds are invested only in businesses that have ethical practices.
Debt-to-Equity Ratio Limit
Shariah-compliant mutual funds must not invest in businesses that have very high debt.
No speculation or Derivatives
Shariah-compliant mutual funds focus on businesses that are not speculative in nature or investments like futures and options.
How Do Shariah Mutual Funds Work?
Shariah mutual funds invest in companies that are Shariah-compliant and do not engage in the above businesses. First, Rating Intelligence Partners (RI) inspects the stocks and then decides whether to include them in the index or not.
Mutual fund houses further invest in businesses that comply with Islamic principles. All stocks are then filtered by both business activity and financial ratio to ensure compliance with Shariah rules.
Each fund is guided by a board of qualified Islamic scholars. Any earnings from non-permissible sources are donated to charity.
What Is The Difference Between Shahriah Mutual Funds Vs Regular Funds?
Shariah-compliant mutual funds focus on ethical investing while regular mutual funds focus solely on financial gains. Here are some of the key differences between a Shariah mutual fund and a regular mutual fund
| Point of Difference | Shariah Mutual Funds | Regular Mutual Funds |
| Investment | Invests only in halal (permissible) companies | Invests on all businesses on the basis of financial potential |
| Exclusion | Business involved in alcohol, gambling, tobacco, etc are restricted | Can invest in any sector till its a legal entity |
| Debt | Limits on debt and interest income | No such limits |
| Target Audience | Built for investors looking for ethical, faith-based investing | Built for investos who are purely focused on returns |
Who Can Invest In Shariah Mutual Funds?
While Shariah-compliant mutual funds are primarily designed for Muslim investors who want to follow faith-based investing and align their investments with Islamic principles, they are also open to anyone who values ethical investing. These funds can be a good choice for new investors or those seeking socially responsible investment options.
Best Shariah Compliant Mutual Funds In India
India’s first Shariah-compliant index was launched in 2010 by S&P. The index introduced was the S&P BSE TASIS Shariah 50 Index.
This was in collaboration with Taqwaa Advisory and Shariah Investment Solutions and consisted of 50 stocks chosen from the BSE 500, strictly selected on the basis of strict business criteria.
Later on, indices like Nifty 50 Shariah, Nifty 500 Shariah, and S&P BSE 500 Shariah were introduced. These indices act as a benchmark for Shariah-compliant mutual funds. Presently, 3 popular Shariah mutual funds are in India:
Tata Ethical Mutual Funds invest in all the companies that are Shariah compliant. The fund generated a return of 10.28% in 3 years, 19.65% in 5 years and 11.39% in 10 years.
Taurus Ethical Fund has high exposure to Energy, Technology and Healthcare stocks. They invest in businesses that are Shariah compliant. The fund generated a return of 12.93% in 3 years, 19.38% in 5 years, and 11.69% in 10 years.
Nippon India ETF Shariah BeEs invests in the companies present in the Nifty 50 Shariah Index. The fund generated a return of 6.37% in 3 years, 15.35% in 5 years and 10.77% in 10 years.
How Are Shariah-Compliant Mutual Funds Taxed?
Shariah Compliant Mutual Funds invest mostly in equity and equity related securities, therefore their tax treatment is similar to that of equity mutual funds.
Under this method, investors have to pay taxes on gains made from selling their mutual funds. The tax is called the capital gains tax and depends on your holding period.
If you sell your investments within 12 months, it’s called a Short-term Capital Gain (STCG). If you invested in a small-cap fund for less than 12 months, gains earned are taxed at a flat rate of 20%.
Similarly, if you sold your investments after a period of 12 months, Long-term Capital Gains (LTCG) are levied. Gains in the long term are exempted up to ₹1.25 lakh gains. Any gain above this amount is taxable at 12.5%.
Are Shahriah Complaint Mutual Funds Profitable?
Yes, Shariah-compliant mutual funds can be profitable just like any other mutual fund. The returns depend on market performance and fund strategy.
Final Thoughts
Shariah-compliant mutual funds, or Halal mutual funds, offer investors ethical investing and financial growth. Whether you follow Islam or simply want your investments to reflect strong ethical values, these funds may be a good fit for you.
Disclaimer:
This blog is for general/educational information purposes and is no way to be considered as advice, or recommendation for investment or otherwise. Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing. Tracking services are not exchange traded product. INDstocks is merely acting as a distributor of Mutual Funds. INDstocks Private Limited (formerly known as INDmoney Private Limited) 616, Level 6, Suncity Success Tower, Sector 65, Gurugram, 122005, SEBI Stock Broking Registration No: INZ000305337, Trading and Clearing Member of NSE (90267, M70042) and BSE, BSE StarMF (6779), AMFI Registration No: ARN-254564, SEBI Depository Participant Reg. No. IN-DP-690-2022, Depository Participant ID: CDSL 12095500, Research Analyst Registration No. INH000018948, BSE RA Enlistment No. 6428.